Formerly known as Cendant Corporation's Real Estate Division, Realogy Corporation (pronounced: Reel-uh-gee) is a leaner, meaner real estate machine.
Doing so well that it will debut today as a member of the S&P 500 Index, Realogy (H) is a spin-off, not an IPO, but Wall Street has high enough expectations that on Aug. 2, the day after "regular way" trading is expected to commence, Chairman & CEO Henry R. Silverman, Smith and Realogy's other executive officers will be on hand for the ceremonial ringing of the NYSE's opening bell.
"We don't need to raise money," says Realogy CEO Richard Smith. "It's a spin-off to shareholders. We're doing this to unlock shareholder value. The market creates a conglomerate discount, but we don't have a hedged portfolio. We have these divisions that are doing well, and we aren't getting credit from Wall Street, so the board's duty is to increase value for shareholders."
Realogy Corporation, according to the company, is the world's leading real estate franchisor with a diversified business model that also includes real estate brokerage, relocation and title services. Realogy's brands and business units include Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, ERA®, Sotheby's International Realty®, NRT Incorporated, Cartus (formerly known as Cendant Mobility) and Title Resource Group.
The story for investors is that Realogy (H) is a chance for investors to bet on the housing market -- without buying a house. It's the only publicly-held company that totally and uniquely serves the residential real estate space.
Among some interesting facts in the Realogy prospectus:
- Realogy or one of its franchisees is involved in approximately one out of every four broker-related transactions
- Realogy and its franchisees earned $16 billion in brokerage commissions in 2005
- NRT Incorporated, Realogy's in-house brokerage firm, recorded $220 billion in sales volume in 2005, more than three and a half times the next largest brokerage
Despite that advantage, Smith says the company isn't interested in market share. "Give me profits over market share any day," he says.
Smith explains that the company is a brand manager. "We are blessed with strong brands that appeal to all ranges of buyers in the marketplace. On the NRT side, there is a lot of consolidation. About 80 percent of the industry is independent (not affiliated with a brand), so it's evolving like the '70s hotel business. Then most hotels were not affiliated with national brands, now they are affiliated with national brands, and boutique hotels are a small part. That's also happening in real estate. As consumers become more global, we think they will tend to migrate to brands they know and trust."
Agents are also finding out that all brokers aren't the same as many hop from brokerage to brokerage trying to find that perfect fit of high commission splits with state-of-the-art technology services and lots of broker advertising money.
"Boutiques are finding it harder to compete," observes Smith. "The media says all brokers are the same and the point is that agents are starting to get it that brokers are not all the same. They provide different levels of service, many don't weather the slowing of the marketplace well, and they can't make investments in the market. The consumer understands it, and deciding to list with one broker or another will come down to the listing presentations and who's better and offers more."
Cartus, the firm's relocation division, "blocks and tackles" for the franchisees and NRT, says Smith. Cartus assignments are generally referred to Realogy-affiliated brokers, generating referral fees for the company and commissions for the brokers.
Title services are a no-brainer. "Title Resource Group is an operating underwriter. It's heavily regulated at the state level and county level. They provide services to NRT, and there's a lot of upside. We've expanded to provide RESPA-compliant services to franchisees. You need it to close a real estate transaction, and those that have it have found it to be a great service to consumers and agents, and its profitable."
It's these intertwined businesses that makes Realogy strong -- approximately 50 percent of Realogy's EBITDA is a function of "successful cross selling through its value circle" -- franchising, relocation, brokerage, mortgage (now an affiliate called PHH Home Loans, LLC, and settlement.
What about spinning off just when the national picture of real estate is slowing? "We started building in 1995. We are longterm, and we continue to be very focused on long-term demographics as opposed to the short-term view. The growth of the last two years was not sustainable. Interest rates are growing 100-200 basis points, but we believe they will stay about where they are through 2025. The dynamics are favorable. This is a blip on the screen -- a normal market."
"This is not sexy -- it's hard work," Smith says. "In 1995, we were told the market would never get beyond 3 1/2 million existing homes sales, and everyone was wrong. There isn't a company this size and scale with a business that is based on a deeply inbred cultural need to own a home. Any business based on a cultural need has a powerful foundation."
